Banks must separate deposits from high-risk trades: EU experts

The report on reforming the structure of the banking sector across the European Union single market was presented to EU Financial Services Commissioner Michel Barnier, and could be taken up in legislative proposals pending a public consultation including savers.

The idea is to "get rid of a system where profits are private and costs are public," Bank of Finland governor and ex-European Commissioner Erkki Liikanen told reporters after the presentation of his panel's conclusions.

This way, "all taxpayers will be better off" and with "more clarity and less complexity," legislative changes will also lead to greater competition, which also serves the consumers, Liikanen said.

Barnier meanwhile said in a statement that the "report will feed our reflections on the need for further action.

"I will now consider the next steps, in which the Commission will look at the impact of these recommendations," he said.

Liikanen's input was published a day before the European Banking Authority issues its final report on banks' implementation of plans to establish temporary capital buffers.

More widely, it was released as European leaders argue over how fast to progress towards eurozone and EU banking-market integration, and how deep that should go -- a technical debate caught up in political disagreement over bailout solidarity among key eurozone governments.

Analysts were less enthusiastic, Sony Kapoor, the head of the Re-Define finance and government consultancy, warning on Twitter that this report "will not lead to the radical shake-up of the EU banking system that may now be needed".

The experts appointed by the Finn said the Commission's proposed Bank Recovery and Resolution Directive -- one of three key spokes identified in so-called "banking union" alongside cross-border deposit guarantees and top-down supervision -- was "an essential part of the future regulatory structure".

Of the key recommendation for legal separation of activities, Liikanen said in a letter summarising conclusions: "The analysis conducted revealed excessive risk-taking -- often in trading highly-complex instruments or real estate-related lending -- and excessive reliance on short-term funding in the run-up to the financial crisis."

There are about 8,000 banks across the EU, and the experience of the 2008 financial crisis was that "risk-taking was not matched with adequate capital protection, and strong linkages between financial institutions created high levels of systemic risk," Liikanen said.

Despite some members advocating a softer approach, he said "the group's conclusion is that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group".

The aim is to ring-fence the "socially most vital parts" of the banking system, thereby facilitating "market discipline and supervision and, ultimately, recovery and resolution".

Liikanen suggested that this would not be required unless more than 15-25 percent of banks' trading activities were in the high-risk sector, or that volumes were worth less than 100 billion euros ($130 billion).

While a firm backer of the principle, European Parliament economics committee chair Sharon Bowles noted that pre-existing proposals to separate banks' activities and implement resolution and recovery plans in the context of capital requirements had already "met some resistance".

She also underlined that curbs on bonuses have been consistently "watered down as being too radical".